Gujarat HC dismisses Essar Steel's plea against RBI

Posted July 17, 2017

What could be a big boost for the government's drive against corporate bad loans, the Gujarat High Court today dismissed a plea by Essar Steel against the Reserve Bank of India (RBI).

It wasn't very thoughtful of the RBI to have directed NCLT to accord priority to certain cases.

In June, the RBI had come out wih a list of 12 companies, comprising around a quarter of the total stressed assets in the banking system, against whom insolvency proceedings could begin.

While RBI deleted the part of its circular on NCLT that the Gujarat High Court objected to, it did well to point out gaps in the Essar Steel argument.

The ruling clears way for the central bank to start loan recovery process against Essar Steel and other defaulters under the amended banking rules that empower the RBI to tackle the country's bad debt issue by dealing directly with lenders and bring defaulters in the insolvency process. "The company was aware about SBI's action".

"It can not be held that Banking Company is not entitled to initiate insolvency proceedings without the directions of the RBI u/s 35AA of Banking Regulation Act", the court ruled, denying any relief on the plea. Instantly acknowledging this error, the RBI told the Gujarat High Court that it would withdraw this line from the press release, and did so by the means of a corrigendum.

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However, the Court observed that it can not be held that RBI's directions are in the nature of classification or such classification is irrational, unjust, arbitrary or discriminatory.

Essar Steel owes lenders around Rs45,000 crore ($6.99 billion), of which Rs31,670 crore had become non-performing as of 31 March 2016. Essar Steel argued that it was not given adequate opportunity to present its position before the insolvency case was filed at the NCLT.

Essar Steel further said it apprehended that bankruptcy proceedings at this stage may lead to deterioration of the companys operations delay the resolution discussion with the lender.

RBI, which is the main respondent in the case, engaged renowned lawyer from Mumbai Darius Khambata, former additional solicitor general of India and Maharashtra advocate general.

One of these 12 accounts was that of Essar Steel. About 12% of the total advances by public sector banks are NPAs, the RBI counsel had stated. Standard Chartered Bank had also moved the NCLT against Esaar.